Monday, November 05, 2007

Wall Street's Game Of Liar's Poker

Oh isn't deception a wonderful thing? To convince the entire world we are in a Goldilocks environment yet to have those same talking heads put the economy into long term peril by their complete and utter disregard for risk management. Just as we said, here it comes: talk of dividend cuts in financial stocks and Citigroup in particular. To date, we've got the CEO of Citi and Merrill out. There will be more. We'll likely have Congressional hearings on what went wrong before it is all over. The irony is the United States Congress and the Executive branch are jointly the single largest contributors to this mess. (Although you are going to see how few people across the globe are wearing bathing suits when the tide rolls out as we quoted Buffett before. In other words, many more problems not apparent to most.) But, someone has to take the fall in the blame game. We know it usually isn't those who should.

If you take anything from this blog, it should be that one should disregard much of what has been "learned" in school, from the media and from half of the people we interact with. When one tracks down the source of all generally accepted knowledge, it is usually suspect at best. I have heard some people say this is a negative outlook on life. Interesting perspective. That might be the position of someone believing their life is the Truman Show but it is far from negative. It's a prerequisite for knowledge. To learning truth. It is the way of the Buddha. And, you don't need to be a Buddhist to seek truth or enlightenment. Now, this might not be possible in all of life's endeavors but when it comes to savings, I prefer to make that a priority. There is nothing wrong with advice from Wall Street or investment professionals but they don't have the same sense of urgency with my savings as I do. Nor do most have my best interests at heart. Wall Street is in the game of perpetuating a racket and they spend more with manipulating ad agencies and marketing organizations than any other industry to perpetuate that racket. So, zombies come on TV and say they are buying Citigroup when it drops from the low 50s to the high 40s. Or they tell you to buy Apple at $130 or $170. If you are adept at trading, that's great. But, where are they when the sell signal comes? Or, do you hold Citigroup to bankruptcy? Too big to fail? We'll see. I expect the government cannot let Citi's U.S. banking business fail but would they save the entire company in a crisis? Maybe Citigroup's problems end at this quarter's reported problems or next quarters.

Why are we repeatedly fixated on these talking heads giving us sound bite advice? Well, that is a complicated bit of psychology. One issue is misplaced trust as John Galbreath and Ben Graham have told us time and again. That belief is perpetuated by a massive marketing machine. And because it isn't their money, Wall Street will do things I would never dream of doing with my own savings. And because they charge management fees on our money regardless of what the market does. And, because incompetence is the rule, not the exception, on Wall Street. So, in a down year as their fees diminish maybe they have to drive a Mercedes and not a Ferrari. Yes, there are competent minds and even great minds on Wall Street but they aren't foolish enough to create the messes we see before us or come on the Lightning Round or the other sound bite gaming spots. Could you see Warren Buffett, David Dreman or Ben Graham participating in such madness? As I said before, when this cycle ends, we will no longer have horns and buzzers and skits on financial television. Those shows will be long gone.

Are you amazed at how the unfolding of current events with financial institutions is catching everyone off guard? Well, I'm not really amazed but I wish I were. A little side story. There is a money manager who has a blog that I read every so often. He's sometimes got worthwhile commentary. I'm not going to name the blog because I don't want to finger him. He wrote this long treatise some time ago as to why he was adding a certain insurance company to his portfolio. It was actually very detailed and he did alot of what I would call cursory analysis. In an environment similar to the last few decades, you'll seldom get the type of analysis Warren Buffett or Ben Graham would do. Something every fund manager making big jack has the resources and capability of doing. But it doesn't seem to be a priority anymore. Why? First, because many have become too reliant on their Bloomberg terminal and don't know how and secondly because of a very lackadaisical mindset in an industry where people are paid inordinate sums of money to be average because we, the customers, allow it. That is why 80+% of money managers underperform the market or index they are tracking. My posted response to his analysis was that insurance companies were eating all of the risk financial companies could feed them and his analysis had holes. It wasn't brilliance on my part to know this, it was called work. If he had done true diligence, he would have known that. This isn't rocket science. We simply have an industry rife with incompetence. Has it always been this way? Yes, but it has reached unprecedented levels. Now, in the last two weeks we find out that same insurance company may have choked down $30 billion in garbage fed to them by Wall Street. True? Rumor? Do you want to buy the stock and wait to find out? Guess what company is now on the new price low list?

Now Goldman Sachs said recently they are glad that others are coming around to the view that international markets will pull us through this slow down. What is that about? Does it make it more likely to be true if more people eat the dog food? Do you feel more safe by having other equally incompetent opinions in your camp? I say incompetent because of the foolish risks Goldman is taking during a period of very heightened global risk. I just can't seem to get away from that damn risk word. Emerging markets are the last great hope of bulls. Do you use hope as your investment strategy? This type of consistently lax view of reality is going to be punished severely. It is so ingrained in this industry that Mr. Market will do the unexpected and punish them beyond what any could imagine. And, someone will say, "See, that book about black swans".....that the herd just lapped up....."is a great piece of insight" or unpredictable events just happened again. And, I will say as I have been saying that is complete nonsense. It was predictable. If it weren't, why have I been writing about it since starting this blog? By the way, did you ever wonder how Goldman managed to report record profits in a quarter where their top hedge fund lost nearly thirty percent of its value? Now, either Goldman clients are getting the shaft and Goldman is keeping the cream for themselves or there are some rather serious losses on their books and we are seeing fuzzy accounting. Or, maybe there is something I just don't understand about first grade math. I'm sure I just need to be enlightened by the great Buddha.

I'm reading more and more that many believe the invisible hand of the Fed is keeping equities afloat. I don't buy that as I have said before. Even if they were trying, and I have no reason to believe they are, centralized planning ist kaput. That strategy cannot control a market of millions of buyers and sellers forever. The levitating action of this market and its resilience is likely being caused by other factors. More on that in one of the next few posts.

Now, where's that inflation everyone has been talking about for the last few years? Once again, this is the safe "herd" opinion of an industry with no historical ability to determine a crisis until after it has happened. As we have discussed incessantly, and my work is backed up by quantitative data to validate that position, it is simply a matter of time until the inflation bugs are proven to be completely wrong. And, that appears to be just about everyone. Until the data changes to an inflationary environment, and I will post on here if it does (and it has a nearly impossible chance of changing), we are in a deflationary environment. The fun is just beginning. Belly up to the bar and get ready to watch the biggest game of liar's poker our generation has ever seen. This will be one to tell your children and grandchildren.
posted by TimingLogic at 6:59 AM

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